Hyundai clashes with Chinese partner over suppliers: sources

Hyundai Motor Co is at odds with its Chinese partner over efforts to cut supplier costs, as they grapple with tough competition and the impact of a standoff between China and South Korea, Reuters reported Tuesday, citing four people familiar with the dispute.

Hyundai, along with affiliate Kia Motors, has been caught up this year in a political row over a US missile defense system deployed in South Korea but opposed by China.

In addition, there is increased competition from local automakers in the world’s biggest vehicle market.

Until last year, Hyundai and Kia ranked No.3 in China by sales. But sales for Hyundai alone slumped 41 percent from January to July, making this the biggest crisis since Hyundai entered the Chinese market in 2002.

Hyundai and its local partner BAIC Motor Corp are divided over how to solve the issue. Hyundai wants to protect its South Korean supply chain, while BAIC favors shifting to cheaper Chinese suppliers, the people said.

“BAIC wants to solve this aggressively and is aggressively pursuing it by asking Hyundai to change its sourcing strategy significantly and immediately,” the head of a Hyundai supplier based in Seoul familiar with the matter told Reuters.

He said that the idea is to source more locally from cheaper suppliers.

Hyundai wants to solve this more gradually “over perhaps five to 10 years and do so in phases,” the person said. BAIC declined to comment. A Hyundai Motor spokesperson told Reuters, “Hyundai Motor and Kia Motors have been continuously trying to source competitive parts in China.”

The standoff underscores the depth of a crisis facing Hyundai and its suppliers in China, heavily reliant on sales to Hyundai Motor and Kia Motors.

South Korea approved the full deployment of the Terminal High Altitude Area Defense (THAAD) system on Monday – a day after North Korea conducted its sixth and most powerful nuclear test – which it said was needed to counter growing threats from North Korea.

China has strongly opposed the system, and has said that its powerful radar poses a threat to its national security.

“China has started to become a grave for South Korean automakers and suppliers,” said Lee Hang-koo, a senior research fellow at the Korea Institute for Industrial Economics and Trade, adding that suppliers are being hit the hardest.

South Korean companies are squeezed between cheaper Chinese suppliers and European rivals that are technologically more advanced, making it challenging for them to diversify their customers beyond Hyundai Motor, according to Lee.

In addition, parts from South Korean suppliers are about 30 percent to 40 percent more expensive than those from local Chinese suppliers, industry sources said.